Neuberger Berman sees case for conviction in US equities

Richard Nackenson, manager of the Neuberger Berman US Multi Cap Opportunities Fund discusses four key themes currently playing out in U.S. Equities:

Reasonable stock valuations, steady growth in the U.S. economy, and strong corporate fundamentals suggest that U.S. equities remain a sound long-term investment. Our key reasons for conviction in 2015 include the following:

1. Continued Economic Expansion Supports Corporate Earnings Growth

The U.S. economy is better than generally perceived. Economic activity continues to improve, with U.S. real GDP expected to grow 3% in 2015. This would represent the fastest pace since 2005. U.S. growth is also expected to exceed growth in Europe, the United Kingdom, Japan and other developed markets. The ongoing growth in the U.S. economy is translating into strong corporate earnings and cash flow. Earnings are expected to increase for all sectors of the S&P 500 in 2015, except Energy which has been impacted by the decline in commodity prices. Excluding the Energy sector, S&P 500 earnings are expected to increase nearly 12%. We believe the current environment should enable successful corporate planning and sustained earnings expansion.

Source: Federal Reserve, ISI Group

2. Valuations are Attractive Compared to History

Equity valuations remain reasonable as stock prices are being supported by higher earnings. As of January 31, 2015, the S&P 500 forward earnings yield was 6.1%, which is in-line with the 20-year average. The spread between the S&P 500 forward earnings yield and the U.S. 10-year Treasury yield is 440 basis points. This represents the “equity risk premium” and is substantially greater than the 20-year average of 195 basis points. This suggests that investors are being well compensated for owning equities. The equity risk premium has become more favourable since the beginning of 2014, even as US equities appreciated. This is due to both the increase in corporate earnings and decrease in the U.S. 10-Year Treasury yield throughout 2014.